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Broker-dealer Ordered to Pay Restitution for Sale of Unregistered Securities

Monday, November 7, 2011
Yoomi Lee | Bloomberg Law FINRA Letter of Acceptance, Waiver and Consent No.2009017240702 (Nov. 2, 2011) The Financial Industry Regulatory Authority (FINRA) announced that broker-dealer Equity Services, Inc. (ESI) submitted a Letter of Acceptance, Waiver and Consent to settle charges that it sold unregistered and unsuitable securities to five retail investors. FINRA asserted that ESI violated NASD Rules 2310(Suitability), 3010 (Supervision), 2110 (Standards of Commercial Honor and Principles of Trade), and IM-2310-2 (Fair Dealing with Customers). Without admitting or denying the allegations, ESI accepted censure and consented to pay a $50,000 fine and $163,815 in restitution. According to FINRA, ESI participated in a private offering of certain corporate notes, which were not registered with the Securities and Exchange Commission, but were sold pursuant to the private placement exemption provided by Rule 506 of the Securities Act of 1933 (Securities Act). One of ESI's registered representatives, however, allegedly sold the unregistered notes totaling $251,000 in six private placement transactions to five investors who did not meet the definition of an "accredited investor," as defined by Regulation D, or capable of evaluating the risks and merits of the prospective investment. This was based on the information that the customers' filled out on ESI's New Business Forms, which included, net worth, annual income, investment objectives, risk tolerance, and the source of funds for the purchase of a particular security. Moreover, FINRA charged that because the securities at issue also were not exempt under Securities Act Section 3(a), ESI acted in contravention of Section 5 thereunder. Finally, FINRA alleged that ESI failed to enforce its supervisory procedures as its registered principals did not closely scrutinize the proposed private placement transactions to ensure suitability. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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